June 25, 2008

Empirical studies in business management repeatedly use business performance as dependent variable in order to predict the potential effect of managerial, operational and behavioral activities within the firm. This second article in the series concerns of financial and operational performance; through the summarization of two seminal papers written by Venkatraman and Ramanujam (1986) and Kaplan and Norton (1992).

Venkatraman and Ramanujam (1986) study consider as an important document for the theoretical discussion regarding the evaluation of the measurement of business performance. One of the key issues addressed by this study is the attempt to delineate the performance concept. More specifically, whether business performance should be differentiated from the overall discussion on organizational effectiveness. The view taken by Venkatraman and Ramanujam (1986) was that business performance, which reflects the perspective of strategic management, is a subset of the overall concept of organizational effectiveness. The narrowest conception of business performance centers on the use of simple outcome based financial indicators that are assumed to reflect the fulfillment of the economic goals of the firm. Venkatraman and Ramanujam (1986) refer to this concept as financial performance. Financial performance measurement is a multi-dimensional one. Sample of financial measures, group into dimensions can be presented as follow: Profitability – return on investment (ROI), earning before interest and tax (EBIT), gross profit margins. Growth - market share growth, Sales Growth. Efficiency – return on sales (ROS), return on equity (ROE). Analyses made by using single financial measure or several measures relating to only one dimension may lead to misleading conclusions. According to Venkatraman and Ramanujam (1986) a border conceptualization of business performance would include emphasis on measures of operational performance, which consists of those key parameters which may lead to an improvement in financial performance. Venkatraman and Ramanujam (1986) note that it would be logical to treat operational performance measures such as market-share, new product introduction, product quality, marketing effectiveness, manufacturing value-added, within the domain of business performance.

Kaplan and Norton (1992) have presented another seminal paper regarding the measurement of business performance. Its name, “The Balanced Scorecard – measures that drive performance” could suggest for the way they approach the issue. According to the writers, since there is increasing need, both for large and small businesses, to master a variety of capabilities in different fields, the traditional measures of financial performance gives inadequate, or in some cases inaccurate, perspective for the status of the business and its ability to keep improving. The balanced scorecard tries to overcome these difficulties through the completion of financial measures, which reflect for actions that already have been taken, with those of operational performance measures, which consists of parameters that may drive the forthcoming financial performance. Operational measures according to the balanced scorecard constructed from three dimensions – How do customers see us? (Customer perspective), What must we excel at? (Internal perspective), Can we continue to improve and create value? (Innovation and learning perspective).